KroBank issues a zero coupon bond and it has to pay the face value of the bond of $100 M due in exactly five years. Assuming interest rates are currently at 8% p.a., which of the following is the best investment option for the bank to ensure it has enough funds to meet the liability in five years:
KroBank issues a zero coupon bond and it has to pay the face value of the bond of $100 M due in exactly five years. Assuming interest rates are currently at 8% p.a., which of the following is the best investment option for the bank to ensure it has enough funds to meet the liability in five years:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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KroBank issues a zero coupon bond and it has to pay the face value of the bond of $100 M due in exactly five years. Assuming interest rates are currently at 8% p.a., which of the following is the best investment option for the bank to ensure it has enough funds to meet the liability in five years:
Invest $100M today in coupon-paying bonds paying 8% p.a. annual coupons with maturity of 7 years (duration is 5.62 years), sell the bonds in year 5.
Invest $100M today in coupon-paying bonds paying 8% p.a. annual coupons with maturity of 6 years (duration is 4.99 years), sell the bonds in year 5.
Invest $100 M today in coupon-paying bonds paying 8% p.a. annual coupons with maturity of 5 years (duration is 4.31 years).
Invest $100 M today in coupon-paying bonds paying 8% p.a. annual coupons with maturity of 8 years (duration is 6.21 years), sell the bonds in year 5.
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